Bloomberg: 'Bitcoin and guns, that's the only way to save Ukraine'

Cryptocurrency looks like the way forward in a Ukraine battered by revolution and corruption.

REUTERS

The spot where a statue of Lenin once presided over Kyiv's downtown is now in a state of mild decrepitude. The plinth remains, but it's covered with graffiti, its steps painted the blue and gold of the Ukrainian flag.

After protesters triumphantly toppled the statue in December 2013, the vacant pedestal served as a memorial to Ukraine's violent rejection of its Soviet past. Since late September, though, the spot has had a new occupant – of sorts. If you point your phone at the pedestal, an app will show you an augmented-reality rendering of the person some say symbolizes the country's future: Satoshi Nakamoto, the anonymous inventor of Bitcoin, Bloomberg wrote.

"He could be Ukrainian," says Alexander Soroka, head of local incubator Startup.Network and co-founder of Satoshi Nakamoto Republic, an organization created to erect AR statues to Nakamoto around the world.

If he can win the mayor's support, he plans eventually to put up a permanent statue in its place. Soroka is correct about Nakamoto: No one knows where he (or she, or they) is from or what he looks like; the statue design shows three human torsos, each with a different skin tone, sprouting from a pair of robot legs. But Soroka is also speaking figuratively, describing how neatly Bitcoin serves the needs of a citizenry with an historic distrust of the state.

Before the protests, which came to be known as the Maidan uprising, Ukraine's cryptocurrency scene was mostly underground, hidden from the prying eyes of then-President Viktor Yanukovych's brutal security services. Revolutionaries toppled his government in 2014, but the country remains embroiled in a war with Russian-backed separatists. Its currency, the hryvnia, collapsed to a record low against the dollar in early 2015 and has stayed weak ever since. Meanwhile, Silicon Valley companies opened offices in Kyiv to take advantage of its cheap rents and abundant skilled labor. About 100,000 Ukrainian engineers contract remotely for Silicon Valley companies, and thousands more do so as under-the-table freelancers. You couldn't design a more ideal environment for the rise of blockchain-based digital currencies if you tried.

In Ukraine, where the average monthly salary is about $300, there are 25 crypto coins, with $1.9 million in daily trading. Hundreds of brick-and-mortar businesses accept various Bitcoin imitators. One rural mayor recently bought the blockchain company Cardano's Ada coin for his constituents. One vendor in Kyiv's central farmers market takes payment in 11 cryptocurrencies. Porsches, Lamborghinis, and Bentleys – playthings previously accessible only to an oligarch – can be seen around Kyiv driven by the crypto rich.

The shiny new wealth is both conspicuous and, for many, welcome. If nothing else, it's a glimmer of hope for a more prosperous future in a part of the world where optimism is scarce.

Anarchists have a natural affinity for frictionless, stateless Bitcoin, and Ukraine in turn has a long and storied history of embracing anarchy. "It's about not believing in the state," says Oleksii Mushak, a young member of Parliament in President Petro Poroshenko's ruling party. Mushak and I are enjoying a meal at Coin – "Like money," the hostess replies when I ask about the name – an upmarket restaurant in a high-rise business center on the outskirts of Kyiv. He says pushing back against government oppressors "is what Ukrainians have been doing for the last 1,000 years."

In the early days of the revolution, Mushak made his living mostly by operating a crypto-mining operation in Kyiv and fundraising for the Maidan movement, which relied in part on digital coins to buy food, armor, and protection against Yanukovych's special forces. He was elected to the first post-Maidan parliament in 2014 and became the nation's first MP to declare crypto assets. Now he's campaigning to regulate cryptocurrency. Mushak sees regulation as a crucial step in ensuring crypto wealth remains within Ukraine's borders. His proposal would impose a flat tax of 5 percent on income from "virtual assets" – a new term the bill would introduce into Ukrainian law – and says the government will limit its oversight to the conversion of digital to fiat currency and won't intervene in crypto-only exchanges.

Ukraine has been through this kind of thing before, a moment of economic change born of great national upheaval. After the Soviet Union collapsed in 1991, rapid, unregulated privatization concentrated almost all of Ukraine's wealth, infrastructure, and resources in the hands of a small group of oligarchs, allowing them to effectively divide the country among themselves. These businessmen continue to operate their own de facto fiefdoms. Many supplement their financial monopolies with physical force and political palm-greasing to maintain their above-the-law status. Almost all of them try to protect their wealth by investing in real estate elsewhere in Europe and keeping their cash in offshore accounts, ensuring that the largesse doesn't trickle down to the average Ukrainian.

Proponents of blockchain say it can help alter the country's most entrenched habits, making the people richer and the financial system more efficient, attractive to business, and secure. Although the revolution may have changed much about Ukraine, it didn't shake its bedrock power structure – and blockchain has been known to cause as much chaos as optimism. The business climate in Ukraine is only "slightly less dangerous" than it was in the anarchic early 1990s, says Michael Chobanian, the father of Kyiv's crypto community. But the possibilities are the same. "We are in the top five in terms of corruption. We have a war going on. The economy is shattered. So basically what I'm trying to say is that we have absolutely nothing to lose."

Ever since its founding by Russian Empress Catherine the Great in 1794, Odesa has been a hub for all varieties of exchange, both licit and illicit. On the roof of the city's beachside M1 Club Hotel, the Blockchain Incredible Party, an annual gathering of Ukraine's most influential crypto enthusiasts, is raging. Chobanian is here. Mushak was invited, but he had to stay in Kyiv for a parliamentary vote. The mood is both exuberant and wary.

Roman Sulzhyk, partner at blockchain finance company Distributed Lab, sits in the corner in a mini cabana, smoking a hookah. Sulzhyk returned to Ukraine in 2015 after 30 years abroad, which included stints at J.P. Morgan and Deutsche Bank AG, to clean things up post-revolution. "The rich of the '90s, they were very good at hiding the bodies," he says between puffs. "These new guys, their skill set is how to program in Python, how to be able to take risks."

Buff, unsmiling security guards in beige uniforms flank the entrances to the party. Over the past year, the crypto community has endured a number of raids, sometimes violent, in which hundreds of thousands of dollars in assets have been seized. In December about 30 men from the Security Service of Ukraine (SBU) raided the Odesa home of Anatoly Kaplan, the 28-year-old founder of ForkLog, a crypto-news site, grabbing computers and personal items and seizing about $250,000 in cryptocurrency. Kaplan was detained and questioned while the SBU moved on to ForkLog's office and corporate apartments, where he says the agents took all his company's computers and a bottle of rum.

Kaplan, who is originally from Novosibirsk, Russia, moved to Odesa in 2012 and is well aware of his industry's unsavory reputation. "Cryptocurrency, Bitcoin, they're magnets for people who are involved in money laundering," he says. Kaplan insists he's kept his nose clean. "I never touch that stuff," he adds. He says the SBU agents agreed to return only a fraction of his property at the time, a practice Kaplan calls business as usual in Ukraine. "If you do not agree, you might be arrested or killed," he says. Kaplan and several members of his staff have since relocated to Tel Aviv and have no plans to return.

Often, the raids are based on suspicions – whether founded or not – that their targets are sending cryptocurrency to the Russia-aligned separatist territory known as Donetsk People's Republic in eastern Ukraine. Kaplan can't discuss the details of the case that's been filed against him, but he said via Telegram that the charges amount to the "kind of classical charges around [having] a Russian passport." Speaking about investigations more broadly, the SBU said in a statement that it's found evidence of cryptocurrencies used to fund everyone including separatists and human traffickers.

Like the Maidan movement before it, the separatists have turned to Bitcoin as a way to get around slower, sanctions-hampered banks. In March authorities said they'd shut down 400 mining operations that were allegedly sending funds to Donetsk. The risk posed by unannounced "government visitors" is so high that Chobanian has dissuaded companies from joining his Blockchain Association until the law is more settled.

Chobanian may be right that the business landscape is less dangerous than it was in the '90s, but only by a degree. "The system remains highly corrupted," says Artem Afian, a managing partner at the Kyiv-based law firm Juscutum Attorneys Association. His firm began accepting cryptocurrency payments from clients in 2013 and now boasts a small team dedicated to defending crypto companies against government raids. "As a lawyer investigating economic crimes, I've seen only bad things," he says. "I haven't seen a real job there" – that is, a raid conducted for what he termed to be legitimate security concerns – "in my entire career."

Lawlessness filters down, too. A few weeks after the ForkLog raid, Pavel Lerner, the chief executive officer of a U.K. crypto exchange, was kidnapped in Kyiv and released only on a $1 million ransom paid in Bitcoin. In May an Odesa man was beaten and robbed of $50,000 by men who'd promised to sell him Bitcoin. Not all crimes are marked by physical encounters: The Financial Times reported that a group of cybercriminals based in Ukraine has stolen more than $50 million in cryptocurrency through worldwide phishing attacks.

Sulzhyk, the Distributed Lab partner, is disillusioned. "We thought there would be zero tolerance for corruption, but that is slow to take hold," he says. As we chat on the hotel roof, we can see cargo ships from China and Turkey sailing into port with goods bound for Odesa's infamous Seventh Kilometer Market, notorious for its counterfeit products. Lately, shipping companies have begun trading with hawkers in cryptocurrency as a way of bypassing customs and import taxes.

Pavel Kravchenko, Distributed Lab's co-founder and Blockchain Incredible Party's main organizer, takes a similarly sober view. "You can't just change the president and decide there will be change," he says. "You have to change the whole structure. You need a different mentality."

In places such as the U.S. and U.K., where cryptocurrencies are often talked about as a fun form of apocalypse insurance, the idea that the blockchain can save everything has become a running joke. In Ukraine, four years of continuous warfare have produced a surplus of apocalyptic episodes, leaving the business community to hope that, maybe, cryptocurrencies live up to the hype.

For the time being, Ukraine inhabits a dual reality where old and new methods of doing business bleed into one another. Converting a cash-based, agrarian economy to the blockchain is no easy feat. "For jumbo airplanes to land, you at least need to build a landing strip. This is what I'm trying to convince our regulators to do," says Sulzhyk, who's lobbying Parliament on crypto legislation, as are Mushak and Chobanian. The conversations haven't been going well. "I say, 'Look, these planes. They can land on your farm if only you build a landing strip!' And they're like, 'Well, if we build a landing strip, we won't be able to grow beets there.' And I say, 'Yes, you won't be able to grow beets.' Then they're like, 'Are you sure these planes will come?' 'No, I'm not 100 percent sure, but I think if you build it, they will come.' This is the level of discussion I'm having with the Ukrainian central bank."

Some progress has been made. In late 2017, Poroshenko's administration worked with BitFury Group Ltd., a U.S.-based blockchain company, to store government data. In September, Mushak introduced his crypto law in Parliament, and Ukrainian regulators are slowly getting behind the idea of moving cryptocurrencies out of the "gray zone" and into the legal financial world. A representative from the central bank said in a statement that it supports regulation and is exploring the idea of a national blockchain-based currency.

But these advances are largely intangible and hidden from view. What the general public sees of cryptocurrency isn't always promising: A Bitcoin ATM I tried in Odesa wouldn't turn on. When I asked Soroka how long it would take to unveil the physical statue of Nakamoto, he got evasive. Aside from projects such as Chobanian's Blockchain Hub, which is redeveloping an entire city block for its new headquarters, the fruits of Ukraine's blockchain flowering have yet to improve the lot of the average citizen.

The day after the Blockchain Incredible Party, a few of the attendees lingered over lunch at an Italian restaurant in Odesa. "We need to organize to improve the roads, the infrastructure, the public utilities," says blockchain developer Andrey Khavryuchenko. "Bitcoin and guns, that's the only way to save this country."

"Not scarier than 100 years of oppression," Khavryuchenko replies. I ask him what he thinks of the risks of doing business in Ukraine, about the SBU raids. "I have to prepare for these contingencies. It's not whether it will happen, it's when," he says. "The people who were raided, they weren't prepared. I'm prepared. I keep my gun cleaned, my powder dry. It's like what they say in Texas: 'If you want it, come and take it.'"

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